Jan. 20 (Bloomberg) -- Chrysler LLC, seeking to bolster its case for long-term survival after a $4 billion bailout, is trading a 35 percent stake to Italy’s Fiat SpA for access to small-car technology and a global sales network.

Cerberus Capital Management LP’s Chrysler, the third- largest U.S. automaker, would get a chance to wean itself from dependence on trucks and the North American market, while Fiat would expand a U.S. foothold now limited to its luxury brands. Today’s non-binding agreement doesn’t involve cash from Fiat.

Widening Chrysler’s lineup and geographic reach would help counter its 30 percent sales slide in the U.S. last year. To keep its federal loans, Chrysler must meet a March 31 deadline to prepare a plan that includes slashing debt by two-thirds, trimming labor costs and revamping operations.

“This does greatly improve their long-term viability,” said Rebecca Lindland, an analyst with IHS Global Insight Inc. in Lexington, Massachusetts. “It definitely will improve whatever they have to present to” the Treasury Department.

Hammered by slumping demand in the worst U.S. auto market since 1992, Auburn Hills, Michigan-based Chrysler has said it burned through at least $6.5 billion in 2008’s second half and would have been out of operating funds by mid-January without the government aid.

Fiat’s Option

Fiat has the option to increase its stake to as much as 55 percent, though that likely wouldn’t happen soon, said a person familiar with the deal who asked not to be identified because the terms are confidential.

Vice Chairman John Elkann told reporters in Milan that Turin, Italy-based Fiat might raise the stake at a later date, without giving details.

Also unspecified were details such as whether Fiat would use U.S. Chrysler dealers to sell Fiat- or Alfa Romeo-brand vehicles, and how soon models from one automaker might be available to the other.

U.S. approval is needed for the alliance. Chrysler and Fiat said they would meet the terms of the Treasury Department bailout, which includes a provision that the loan would be considered in default should there be a change in control of the U.S. company.

“The ownership structure by our various constituent groups will not be determined until the final restructuring plan is agreed to by all constituents and the U.S. Treasury,” Dave Elshoff, a Chrysler spokesman, said in an e-mail.

Cerberus’s Purchase

Cerberus bought 80.1 percent of Chrysler in 2007 from Germany’s Daimler AG, which reaffirmed today it plans to unload the rest.

A Treasury spokeswoman, Brookly McLaughlin, couldn’t be immediately reached for comment as President Barack Obama’s administration took office in Washington. Italian Finance Minister Giulio Tremonti called the accord “good news.”

Light trucks, which include pickups and sport-utility vehicles, made up 62 percent of Chrysler’s U.S. sales in 2008, the most among domestic automakers. That left Chrysler at a disadvantage as gasoline soared to a record $4.11 a gallon. Fiat’s strengths include a distribution network in Russia, China and South America and a lineup of small, fuel-efficient cars.

U.S. sales in the small-car category, including models such as Honda Motor Co.’s Fit, rose 12 percent last year, bucking an 18 percent industrywide decline, according to Autodata Corp. in Woodcliff Lake, New Jersey.

Fiat’s models in Europe in 2007 were the least-polluting among vehicles built by the top 10 carmakers, according to a report last year from London-based JATO Dynamics, an auto industry research firm.

Cutting Capacity, Dealerships

Chrysler still must stem last year’s U.S. sales slide, chop capacity and trim dealerships, said Kim Rodriguez, who leads Grant Thornton LLP’s automotive-restructuring practice and is based in Southfield, Michigan.

“This certainly gives Chrysler a boost, but it doesn’t solve the problem,” Rodriguez said today in an interview.

For Fiat, the accord would open up Chrysler products such as pickups, SUVs and new electric vehicles, a step toward Chief Executive Officer Sergio Marchionne’s goal of expanding auto operations he said on Dec. 6 were too small to survive without a partner.

Italy’s biggest automaker pulled Alfa from the U.S. 14 years ago and hasn’t sold its namesake brand there since 1983, restricting the company’s offerings to luxury models from Ferrari and Maserati.

Small-Car Expertise

“We’ll have to see how much Fiat will need to invest, but this would allow them to enter the U.S. market as a protagonist in a forthcoming recovery with its expertise in small cars,” said Davide Manenti, chief of research at Nuovi Investimenti Sim SpA in Biella, Italy. “That’s a great opportunity.”

Fiat fell 1.3 percent to 4.42 euros in Milan trading. The stock has declined 3.7 percent this year.

Chrysler and Fiat should complete their partnership by April, CEO Robert Nardelli said in a letter to employees. The alliance “offers new opportunities to compete in the U.S. market and the global marketplace,” United Auto Workers President Ron Gettelfinger said in a statement.

Chrysler still has more dealerships and factories than it needs, with Fiat likely to take up about 10 percent of that production capacity at best, Grant Thornton’s Rodriguez said. The two companies are an excellent fit, because they have virtually no overlap in products or geographic reach, she said.

The proposed structure of the alliance differs from the 1998 merger of Chrysler Corp. with the former Daimler-Benz AG. There are no plans to combine management, and Fiat and Chrysler vehicles are both aimed at a mass market, instead of at luxury buyers like those targeted by Daimler’s Mercedes-Benz.

Other Fiat Partners?

CEO Marchionne ended four years of losses at Fiat in 2005 after adding models and scaling back spending by sharing components among cars and through partnerships with competitors. The biggest decline in Italy’s car market since 1993 is forcing him to consider cutting financial goals for the first time since returning the company to profit.

Chrysler is not “the final solution,” said Paolo Mosole, an analyst in Milan with Intermonte, in a note to investors today. Mosole said PSA Peugeot Citroen, based in Paris, is another likely partner.

Elkann, the Fiat vice chairman, said the company could still make deals with other carmakers.

Chrysler already has product partnerships with Volkswagen AG, Europe’s biggest automaker, and Nissan Motor Co., which is No. 3 in Japan.

Nissan doesn’t see the Fiat alliance as “having any particular impact” on small-car and pickup truck projects with Chrysler, said Alan Buddendeck, U.S. vice president of corporate communications. He declined further comment.

Volkswagen’s minivan partnership with Chrysler also won’t be affected, spokeswoman Jill Bratina said in an e-mail.

To contact the reporters on this story: Marco Bertacche in Milan at mbertacche@bloomberg.net; Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net.

Last Updated: January 20, 2009 16:54 EST